Bankruptcy and Insolvency

Albert Bohémier*

Table of Contents

INTRODUCTION

The new Civil Code of Québec came into force on January 1, 1994. Its Final Provisions state that it "replaces the Civil Code of Lower Canada adopted by chapter 41 of the statutes of 1865 of the Legislature of the Province of Canada, An Act respecting the Civil Code of Lower Canada, as amended."

The new Civil Code restates some pre-Confederation bankruptcy and insolvency provisions in their original or slightly modified form, amends some quite extensively, repeals[1] others outright and includes a few new provisions in this area.

It should be noted that the Civil Code of Lower Canada was enacted by the Legislature of the United Province of Canada. Its provisions were continued in force by section 129 of the Constitution Act, 1867, which reads as follows:

[A]ll Laws in force in Canada. shall continue . . . subject nevertheless . . . to be repealed, abolished, or altered by the Parliament of Canada, or by the Legislature of the respective Province, according to the Authority of the Parliament or of that Legislature under this Act.

Thus, the power to amend pre-Confederation laws is distributed between the provinces and the federal government in accordance with sections 91 and 92 of the Constitution.

Section 91(21) of the Constitution grants the Parliament of Canada exclusive jurisdiction over "Bankruptcy and Insolvency", and section 92(13) gives provinces a similar jurisdiction over "Property and Civil Rights in the Province". Over the years, "Bankruptcy and Insolvency" has been rendered in French in a number of ways. In some cases it is referred to as banqueroute et insolvabilité or banqueroute et faillite,[2] in other cases as faillite et insolvabilité or simply faillite .[3] The main reason for the use of this particular terminology is found in English legislative history. A dual system had long existed in England: bankruptcy for traders and insolvency for insolvent debtors imprisoned for debt. The two systems were merged in 1861 by an English statute entitled An Act relating to bankruptcy and insolvency. That terminology was repeated in the Constitution Act, 1867.

The French version of this study refers to federal jurisdiction over faillite et insolvabilité, but the words are of little significance, since this expression will be used in reference to the federal sphere of jurisdiction, as defined over time by legal scholars and the courts.

The issue under discussion is whether the provincial government could, in reforming the Civil Code, repeal or amend the pre-Confederation bankruptcy and insolvency provisions of the Civil Code of Lower Canada. Did those provisions relate to property and civil rights or did they come instead within the exclusive jurisdiction of the federal government? If the first theory is accepted, the reform is irreproachable in the subject area in question. If the second theory prevails, the pre-Confederation provisions continued in force by section 129 of the Constitution are obviously still in force and could not have been validly repealed or amended by the new Civil Code. The question then arises as to whether the federal government should intervene in any manner to help make the reform effective.

Discussion may begin with the observation that the pre-Confederation provisions in question can all be related, in one aspect at least, to a provincial sphere of jurisdiction. To satisfy the reader of this fact, the first part of this study will discuss federal and provincial spheres of jurisdiction in this area. The second part will examine, one by one, the pre-Confederation provisions repealed or amended by the new Code and will look at the new provisions that have been included.

I. FEDERAL AND PROVINCIAL SPHERES OF JURISDICTION

It is not within the scope of this paper to conduct a systematic, in-depth analysis of the extent of federal jurisdiction over bankruptcy and insolvency. The intention is to discuss the general parameters that commentators and higher courts have adopted in discussing the issue. This will then serve as a basis for a more detailed analysis of the fate of each pre-Confederation provision.

A. Parliament of Canada's exclusive jurisdiction over bankruptcy and insolvency[4]

Section 91(21) of the Constitution Act, 1867 gives exclusive jurisdiction over bankruptcy and insolvency to the Parliament of Canada. Upon that supposition, jurisdiction involves an [Translation] "exclusive minimum content"[5] that cannot be affected by provincial legislation. It also means that the Parliament of Canada may enact, under its ancillary powers, a number of laws in order to achieve its legislative goals. A brief sketch of the development of judicial decisions on this subject will make it easier to determine the provincial legislature's room to maneuver in this area in terms of civil law.

To begin with, under the influence of English legislative history, Canadian courts have been inclined to interpret the scope of this exclusive jurisdiction broadly. Thus, in 1868, a provincial enactment that would have assisted insolvent debtors imprisoned for debt was held invalid.[6] Such a law was held to be "insolvency legislation" as the term is conceived in English law.[7] The courts later moved towards a more restrictive interpretation of the substance of the exclusive federal jurisdiction. The history of Canadian bankruptcy law, the evolution of general economic conditions, and the development of the major constitutional legal theories influenced them in this task. The evolution of judicial opinion in this area has been analysed in a work published by this writer:[8]

[Translation] In the beginning, the courts tended to define the exclusive area of federal authority narrowly. This attitude proved all the more pragmatic in that it coincided with the Parliament of Canada's almost complete refusal, between 1880 and 1919, to exercise its responsibilities in the area of bankruptcy.

In the Assignment Case, which dealt with the voluntary assignment of assets organized by provincial legislation, the Privy Council more or less defined the law of bankruptcy as a system designed to facilitate the compulsory liquidation of an insolvent debtor's assets for the benefit of his creditors. This is why the Privy Council held that provincial legislation concerning the purely voluntary assignment of assets and addressed, furthermore, to all debtors, whether or not solvent, was valid:

But it will be seen that it is a feature common to all the systems of bankruptcy and insolvency to which reference has been made, that the enactments are designed to secure that in the case of an insolvent person his assets shall be rateably distributed amongst his creditors whether he is willing that they shall be so distributed or not. Although provisions may be made for a voluntary assignment as an alternative, it is only as an alternative. In reply to a question put by their Lordships the learned counsel for the respondent were unable to point to any scheme of bankruptcy or insolvency legislation which did not involve some power of compulsion by process of law to secure to the creditors the distribution amongst them of the insolvent debtor's estate.[9]

Apart from the legislative vacuum which favoured that interpretation, this restrictive definition of bankruptcy corresponded in great part to the economic and social ideas of the time. Bankruptcy legislation is viewed as legislation directed at the interests of creditors. It is the coercive nature of the debtor's divestiture that is seen as the distinctive feature of the law of bankruptcy. Such a restrictive concept of federal jurisdiction might give the impression that the provinces, in the absence of federal legislation, could intervene in the area of bankruptcy, provided that such intervention was limited to measures involving voluntary divestiture or techniques not involving divestiture.

Developments in the courts shattered the overly restrictive framework of that convenient but too narrow concept in bankruptcy law resulting from its legislative history. Further developments would move towards accepting the usual or exclusive jurisdiction of the Parliament of Canada.

In the 1920s, under the pressure of new needs that required more specialized legislation to come to the aid of various classes of insolvent debtors, there was greater awareness of the impact that bankruptcy law could have on social and economic structures. The Parliament of Canada had enacted a general bankruptcy statute in 1919. Doubtless considering this insufficient or poorly suited to their regional needs, provincial governments, particularly those in the western provinces, proved from the outset especially bold and aggressive in this area.

War, general fluctuations in world markets, the Great Depression of 1930 and later and drought in the western provinces were all factors that increased the risks of insolvency and called for specific and rigorous intervention. In 1915, the Canadian provinces themselves had begun to enact various laws providing for moratoriums and the adjustment of debts.[10] The western provinces were particularly active in this area. Those provinces, whose chief resource was agriculture, were deeply affected by war, the Depression and drought:

The combination of falling prices, drought and rigid costs was disastrous to agriculture in the Prairie Provinces. . . . In so far as these expenses could not be paid for in cash they resulted in the accumulation of debt or were met with government assistance. During 1931, 1932 and 1933 there was virtually nothing with which to meet living expenses and the net cash income was not sufficient to meet depreciation of buildings and machinery.[11]

From a theoretical point of view, the initial issue was whether the Parliament of Canada could directly enact compulsory arrangement laws that did not involve divestiture of the debtor (see Assignment Case above). Apart from the legislative background, which showed that such legislation was a natural component of a bankruptcy and insolvency system, the courts pointed out that, while bankruptcy referred to compulsory liquidation, insolvency was a far broader concept and could include any measure designed to provide a remedy in cases of insolvency:

Therefore, if the proceedings under this new Act [the federal Companies Creditors' Arrangement Act] of 1933 are not, strictly speaking, "bankruptcy" proceedings, because they had not for object the sale and division of the assets of the debtor, they may, however, be considered as "insolvency proceedings". . . .[12]

In other words, legislation that remedies insolvency through compulsory liquidation, by way of an arrangement or other means, ultimately has the same objective and comes under the exclusive jurisdiction of the Parliament of Canada:

Further, it cannot be maintained that legislative provisions as to compositions, by which bankruptcy is avoided, but which assumes insolvency, is not properly within the sphere of bankruptcy legislation.[13]

If federal jurisdiction were to be extended in this way, it would mean that all provincial legislation that proposed to remedy insolvency directly or indirectly would be invalid as ultra vires the powers of the provincial legislatures. This explains how provincial debt adjustment legislation[14] was held unconstitutional, along with legislation on moratoriums or mediation[15] and orderly payment, having similar goals.[16]

As a result, it appears that the Parliament of Canada's exclusive jurisdiction extends to any legislation that proposes coercive remedies for insolvency. The technique chosen is of no particular importance: it can be compulsory divestiture for an insolvent debtor - at one time viewed as the distinguishing badge of bankruptcy - or it may be a system of arrangements, adjustments or consolidation of debts. The essential factor is that there be insolvency and that legislated remedies be brought to bear. Once this happens, there is no longer any need to try to distinguish between bankruptcy and insolvency, as had apparently been done in the Assignment Case.[17]

In the above-described evolution towards a broadening of federal jurisdiction, a still-existing judicial trend has viewed bankruptcy or insolvency as the actual subject matter of the jurisdiction.

For some, this jurisdiction has become, as it were, the power to legislate on insolvency or bankruptcy, whereas one might have thought that these were only prerequisites to the legitimacy of federal intervention.

In the context of this extended interpretation, Wentworth[18]may be cited:

In so far as the Ontario provisions purport to provide a scheme of distributionupon insolvency, they are invalid per se.[19]

Similarly, in Robinson v. Countrywide Factors Ltd.,[20] the issue was whether a preferential payment made by an insolvent person more than three months before his bankruptcy could be set aside under a provincial statute aimed at invalidating such payments.[21] A majority of five judges found the provincial statute valid as an integral part of a system of civil law. For the four dissenting judges, however, the impugned provincial legislation was invalid because it dealt with bankruptcy:

Provincial legislation which purports to provide for impeachment of preferences to creditors given by a person who is then insolvent, where insolvency is the sine qua non of impeachability, is invalid as a direct invasion of exclusive federal power in relation to bankruptcy and insolvency.[22]

In Deloitte Haskins and Sells Ltd.,[23] the provincial statute provided for a charge against the assets of the employer in favour of the Workers'Compensation Board of Alberta. As the former had declared bankruptcy, the Board claimed status as a secured creditorunder section 2 of the Bankruptcy and Insolvency Act, even though its claim belonged to the class of preferential but unsecured claims referred to in section 136. According to the Supreme Court, despite the introductory words of section 136,[24] the claims listed in section 136 clearly showed the intention of the Parliament of Canada to deprive the classes of creditors mentioned therein of their secured creditor status.[25] What must be stressed here is that, of the six judges who took that position, three thought it important to note that the provincial statute was inoperative because it conflicted with the federal statute, while the other three simply considered the provincial statute as inapplicable. There is a rather similar ambiguity in the recent decision of the Supreme Court in Husky Oil Operations Ltd.[26]

The issue was whether section 133 of The Workers' Compensation Act, S.S. 1979, c. W-17.1, which gave the Board preferential treatment through the workings of the compensation scheme, was valid in terms of section 97(3) of the Bankruptcy Act R.S.C. 1985, c. B-3, or whether it effectively modified the order of priority established by that Act.[27]

According to the majority view, although there was no doubt that section 133 of the provincial legislation in question was valid in a civil law context, that provision could not be applied in the case of bankruptcy. Even if one were in agreement with that view, one might entertain certain reservations regarding some of the reasons advanced. According to Gonthier, J., on behalf of the majority:

I have already concluded that the impugned legislation must be declared inapplicable rather than inoperable in bankruptcy. I should perhaps explain that this is preferable for the simple reason that bankruptcy is an exclusive federal domain within which provincial legislation does not apply, as distinguished from areas of joint or overlapping jurisdiction, where federal legislation will prevail, rendering provincial legislation inoperable to the extent of any conflict.[28]

These statements may be understood in two ways. They may mean that a province can in no circumstances regulate the order of collocation of an insolvent debtor's assets, since this is an area exclusively reserved to federal jurisdiction. However, another reading is possible. The Parliament of Canada, having validly legislated on the distribution of the assets of a person who has been declared bankrupt, has enacted a complete code on this matter, which thus excludes any provincial intervention having the effect of modifying that order of distribution.[29]

The issue of preponderance or inapplicability is really of little interest in itself for the purposes of this study. As the court unanimously recognized in this case, the provincial legislation may be inoperative or inapplicable in the case of bankruptcy, but it is still valid and intra vires the legislative powers of the province, in the absence of bankruptcy proceedings.

For example, article 2726 C.C.Q. grants a hypothec to employees who have participated in the construction or renovation of an immovable to the extent of the increase in value added to the immovable. Constitutionally speaking, the validity of this provision is unquestionable.[30] However, if the owner of the immovable declares bankruptcy, it can be claimed that the hypothec is no longer in effect, since the claims of the employees figure on the list of claims referred to in section 136 of the B.I.A.[31] In other words, what is involved is essentially not the validity of the provincial enactment in itself, but a conflict of laws issue: does the provincial legislation become inoperative or inapplicable in the context of bankruptcy proceedings?

This long lengthy discussion can be justified by the need to emphasize that the state of insolvency is not the real subject matter of federal jurisdiction. Rather, the federal Parliament's jurisdiction relates to the power to intervene legislatively in order to remedy this state. In other words, as Professor Carignan wrote, [Translation] "whether the words 'Bankruptcy and Insolvency' designate criteria of ultimate purpose or criteria of substance, they must be interpreted . . . with strict reference to a general rearrangement of the assets of the insolvent person."[32]

B. Powers of the provincial legislature

While it is legitimate to recognize that the Parliament of Canada has extensive room to maneuver in the area of bankruptcy in pursuit of its specific goals, the undue hampering of provincial legislative action must be avoided. The difficulty lies in the very close relationship between bankruptcy law and civil law. These two branches of law are a part of private law. Insolvency occurs because a person cannot meet the civil liabilities he has assumed. Bankruptcy law is thus super-imposed on civil law provisions because the normal operation of such provisions is disturbed by the debtor's insolvency.

However, civil law may not "close its eyes" to the fact that a number of debtors may become insolvent. To function, it must take this reality into account in regulating the legal relations of debtors and creditors. In this way, the provincial legislature pursues its own purposes without invading the legislative field reserved to the Parliament of Canada or putting itself in a position where it could be accused of pursuing legislative goals that fall under the powers of the federal Parliament.

That is what the late Beetz J. clarified in Robinson v. Countrywide Factors Ltd.[33] in showing that the word insolvency in section 91, paragraph 21 of the Constitution Act, 1867 does not refer to the condition but to the power to remedy this condition:

Insolvency has been defined by Lord Thankerton in the Farmers' Creditors Arrangement Act reference, Attorney-General for British Columbia v. Attorney General for Canada [[1937] A.C. 391], at p. 402:

In a general sense, insolvency means inability to meet one's debts or obligations; in a technical sense, it means the condition or standard of inability to meet debts or obligations, upon the occurrence of which the statutory law enables a creditor to intervene, with the assistance of a Court, to stop individual action by creditors and to secure administration of the debtor's assets in the general interest of creditors; the law also generally allows the debtor to apply for the same administration.

The primary meaning of "insolvency" in s. 91.21 of the Constitution is insolvency in the technical sense, not in the general sense. This Lord Thankerton made clear just a few lines after the passage quoted above: with respect to the jurisdiction of Parliament under s. 91.21, he referred to ". . . the statutory conditions of insolvency which enabled a creditor or the debtor to invoke the aid of the bankruptcy laws . . ." .

There is no common law of bankruptcy and insolvency in the technical sense, but the disruptions resulting from insolvency in the general sense had of necessity to be taken into account by general legal systems such as the common law and the civil law. Insolvency lies at the core of those parts of the common law and of the civil law which relate to such matters as mortgage, pledge, pawning, suretyship and the securing of debts generally which are implicitly or explicitly predicated on the risk of insolvency and which produce their full effect when the risk has been converted into reality; so it is with the rules which determine the rank of privileges and hypothecs or which ordain that an insolvent or bankrupt debtor shall lose the benefit of the term (art. 1092 of the Quebec Civil Code). Some of the most fundamental principles of the civil law are expressed in arts. 1980, 1981 and 1982 of theQuebec Civil Code. . . .[34]

In other words, subsection 91(21) of the Constitution Act, 1867 is intended to allow the Parliament of Canada to regulate situations of insolvency, but not to sterilize legitimate provincial action within its sphere of jurisdiction:

When the exclusive power to make laws in relation to bankruptcy and insolvency was bestowed upon Parliament, it was not intended to remove from the general legal systems which regulated property and civil rights a cardinal concept essential to the coherence of those systems. The main purpose was to give to Parliament exclusive jurisdiction over the establishment by statute of a particular system regulating the distribution of a debtor's assets. However, given the nature of general legal systems,the primary jurisdiction of Parliament cannot easily be exercised together with its incidental powers without some degree of overlap in which case federal law prevails. On the other hand, provincial jurisdiction over property and civil rights should not bemeasured by the ultimate reach of federal power over bankruptcy and insolvency . . .[35]

A particularly pertinent illustration of the difficulties this paper wishes to highlight is the relatively recent discussions on the constitutional validity of the legislation known as "Personal Property Security Acts" (PPSAs) in the common-law provinces. These statutes require creditors holding any form of security to submit to a registration system. A creditor who fails to so perfect his claim will see his rights subordinated to those of creditors who have complied with the required formalities, and in particular, to those of a trustee in bankruptcy. Some have argued that these provincial statutes are ultra vires or conflict with federal legislation on the grounds that they alter the rights of certain creditors in bankruptcy proceedings.

In this article, it is argued that s. 22(1)(a)(iii) of the PPSA, in so far as it singles out trustees in bankruptcy and purports to confer special rights upon them, is in pith and substance legislation respecting bankruptcy and insolvency and, as such, ultra vires the provincial legislation.[36]

[...]

If the provincial legislation expands or diminishes the rights of secured creditors from what would have been had not bankruptcy occurred, it is ultra vires.[37]

This interpretation has not been followed by the courtsC and rightly so, in our view.[38] As has been pointed out, the essential purpose of such provincial statutes is to bring legislation governing the rights of secured creditors into the modern era. They fall completely within the objectives that may legitimately be pursued by the civil law.[39] Although these statutes explicitly refer to the trustee in bankruptcy, they do not become invalid in themselves, or conflict with federal legislation.[40]

Professor Carignan's words on the division of jurisdiction in bankruptcy and civil law may serve as a conclusion:

[Translation] Paragraph 13 of section 92 also allows the provinces to legislate in relation to insolvency, even if, in interpreting such legislation, the scope of the words "Property and Civil Rights" must be amputated from that of the expression "Bankruptcy and Insolvency". Because of the historically narrow interpretation adopted by the courts, "Bankruptcy and Insolvency" must be understood strictly with reference to the general rearrangement of the debtor's assets, subject only to the foregoing. Accordingly, the civil effects of insolvency considered independently of any such rearrangement come under paragraph 13 of section 92. This, as we haveseen, comes out of the recent judgment of the Supreme Court of Canada in Robinson.[41]

It remains to be determined whether, apart from their jurisdiction over the civil effects of insolvency, the provinces could, in an incidental and accessory manner, generally restructure the assets of an insolvent debtor. From a teleological viewpoint, the answer must be affirmative. Since insolvency has a marked effect on legal relations in general, it is hard to understand how the legislatures could discharge their responsibilities without concerning themselves with the problem that it poses. In truth, with the exception of the principle of the discharge of the bankrupt, it is hard to imagine a rule of bankruptcy law that it could not validly enact as incidental or ancillary to its powers. This result, which may appear surprising at first glance, comes from the fact that bankruptcy legislation is an organic part of private law from which it may not be severed without affecting the harmony and coherency of the whole.[42]

II. ANALYSIS OF THE CONSTITUTIONALITY OF THE REFORM OF THE CIVIL CODE

This section will analyse the articles of the Civil Code of Lower Canada that have been repealed or amended by the Civil Code of Québec. These provisions are reproduced in the tables in the appendices and, to facilitate discussion, they have been grouped around certain themes.

Two preliminary observations are in order. The only question here is whether the repeal or amendment effected by the Civil Code reform is valid in itself. Although some observations may be made from time to time on this subject, the writer does not intend to determine whether a validly amended provision is in fact operative where it conflicts with federal legislation.

A. Definition of bankruptcy (art. 17(23) C.C.L.C.)

This article has been repealed. It defined "bankruptcy" as the "condition of a trader who has discontinued his payments".[43] The definition followed French legal tradition, reserving bankruptcy for traders or merchants. It was also in keeping with The Insolvent Act, 1864, according to which the law of bankruptcy applied to everyone in Upper Canada but only to traders in Lower Canada.[44]

The new Civil Code no longer contains a definition of bankruptcy. Where this word appears in the Code, it apparently refers to the condition of bankruptcy resulting from the application of federal legislation on bankruptcy and insolvency.[45]

Subject to some comments below (note 69), the repeal of article 17(23) C.C.L.C. does not, in my opinion, pose any difficulty. This provision does not in itself create law. Its application lies only in terms of the other provisions of this Code that refer to it. If the other provisions fall under provincial jurisdiction, as will be seen, there is no obstacle to the provincial legislature's enacting, amending or repealing a definition for the purposes of implementing the Civil Code. Furthermore, the definition in article 17(23) C.C.L.C. did not refer to bankruptcy legislation. According to the latter, bankruptcy resulted from the assignment of assets by a debtor or the issuance of a writ of attachment in compulsory liquidation at the behest of a creditor. But in article 17(23) C.C.L.C., bankruptcy refers to the condition of a trader who has discontinued his payments, independently of any procedures that might be exercised under federal bankruptcy legislation.[46] Basically, for the provisions of the Civil Code to apply to an insolvent debtor, the traditional definition of that condition does not appear to be adequate. For a trader, discontinuance of payments is more determinative of insolvency than insufficient assets.

Accordingly, to the extent that this definition relates only to those provisions that fall under provincial jurisdiction, its repeal does not pose any real problem.

B. Curators to property (art. 347(5) C.C.L.C.)

This article has been repealed. It provided that curators to property were, among other things, those appointed "to property abandoned by insolvent traders who have made an abandonment of their property for the benefit of their creditors, or by arrested or imprisoned debtors, or on account of hypothecs." The Civil Code and the Code of Civil Procedure required the curator to swear an oath.

This provision referred to insolvent traders and imprisoned debtors who had made an abandonment, or an assignment, of their property. It was shown above (note 7) that an isolated decision, handed down in 1868, had held that imprisonment for debt and discharge of debtors came under federal jurisdiction, because they involved "insolvency".[47]

However, that interpretation was not followed in subsequent cases on the grounds that imprisonment for debt and measures limiting or mitigating the application thereof were essentially matters of civil procedure in respect of which, in the absence of federal legislation, the provinces could validly intervene.[48]

In respect of the assignment of property itself, the Privy Council made it clear that nothing prevented the province from legislating with respect to voluntary assignments of assets.

Their Lordships do not doubt that it would be open to the Dominion Parliament to deal with such matters as part of a bankruptcy law and the provincial legislature would doubtless be then precluded from interfering with this legislation in as much as such interference would affect the bankruptcy of the Dominion Parliament. But it does not follow that such subjects as might be properly be treated as ancillary to such a law and therefore within the powers of the Dominion Parliament, are excluded from the legislative authority of the provincial legislature when there is no bankruptcy or insolvency legislation of the Dominion Parliament in existence.[49]

The Code of Civil Procedure could therefore validly contain provisions on voluntary assignments and capias ad respondendum.[50] These particular procedures were for many years applied alongside the bankruptcy system established by the Parliament of Canada.[51] The capias was abolished in 1897 and assignment of property, having to a great extent become inoperative through the federal bankruptcy legislation of 1919, was definitively repealed by the Code of Civil Procedure of 1965.

For all these reasons, I am certain that the institution of curators to property related to provincial legislative powers, and hence the repeal of article 347(5) C.C.L.C. raises no problems.

C. Disqualification and cessation of function (art. 1755(4) C.C.L.C.; arts. 327, 1355, 1356(1) and 2175(2) C.C.Q.)

Article 1755(4) C.C.L.C. stated that mandate terminates by the bankruptcy of either party. This is repeated in article 2175(2) C.C.Q., but with slight modifications. Article 327 of the new Civil Code of Québec provides that a bankrupt is disqualified from being the director of a corporation, while articles 1355 and 1356(1) C.C.Q. provide that the duties of an administrator of the property of another terminate upon his or the beneficiary's becoming bankrupt, and that the administration ends when the rights of the beneficiary over his administered property end.

Constitutionally, these provisions are not problematic; they concern provincial matters, the administration of a corporation or the property of another.

These duties impose particular obligations on those who exercise them and must be based on a certain relationship of trust. This does not involve legislation to relieve the effects of insolvency. It is completely legitimate for provincial legislation to take account of an insolvency to establish a disqualification or terminate the duties of the persons who administer legal institutions created by provincial law.

D. Changes in the obligation of solidary debtors or debtors liable to repay the same debt in the event of insolvency (arts. 742, 749, 750, 1118,1119, and 1184 C.C.L.C; arts 830, 890, 892, 893, 1538 and 1690 C.C.Q.)

Articles 742, 749 and 750 C.C.L.C. provide for the apportionment of the debt of an insolvent debtor among coheirs or copartitioners. These rules are repeated in a different form in articles 830, 890, 892 and 893 C.C.Q.

Articles 1118 and 1119 C.C.L.C. establish rules of the same kind for solidary debtors. Similar rules are repeated in article 1538 C.C.Q. Finally, article 1690 (new law), based on article 1184 C.C.L.C. regulates the particular application of these rules where release has been granted by the creditor to one of the solidary debtors. With the partial exception of article 1690 C.C.Q., as to substance, the new articles, under a different formulation, repeat the principles established by the Civil Code of Lower Canada. The search for equal apportionment, among solidary debtors or those liable to repay a same debt, of the increased burden resulting from the insolvency of one of their number would seem to come under provincial jurisdiction. It is impossible to legislate adequately with respect to the obligations of such debtors without contemplating the possible insolvency of one of them.

E. Amendments to or restrictions on certain contractual rights in bankruptcy or insolvency

This section groups together various rules that modify or restrict the rights and obligations of the parties in bankruptcy or insolvency.

1. Loss of benefit of term (arts. 1092 and 1790 C.C.L.C.; arts. 1514 and 2386(2) C.C.Q.)

Article 1092 provides that the debtor cannot claim the benefit of the term when he has become a bankrupt or insolvent. Article 1514 C.C.Q. is to the same effect. Article 1790 C.C.L.C. establishes a similar rule with respect to the demand for the capital of a rent constituted in perpetuity. Article 2386 C.C.Q. reproduces that rule in a slightly different form. Articles 1092 and 1790 C.C.L.C. were in force in 1867 and, if only for that reason, their validity is not in question.

But what appears more important is the undeniable authority of the provincial legislature to provide for the loss of the benefit of term in the case of bankruptcy and insolvency. This forfeiture is quite legitimate in these circumstances. In Robinson,[52] Beetz J.wrote:

Insolvency lies at the core of those parts of the common law and of the civil law which relate to such matters as mortgage, pledge, . . . which are implicitly or explicitly predicated on the risk of insolvency and which produce their full effect when the risk has been converted into reality; so it is with the rules which determine the rank of privileges and hypothecs or which ordain that an insolvent or bankrupt debtor shall lose the benefit of the term. . . .[53]

Finally, it should be remembered that the Bankruptcy and Insolvency Act contains a similar rule. According to section 121(3) B.I.A., in the case of bankruptcy proceedings, "a creditor may prove a debt not payable at the date of the bankruptcy," subject to a certain rebate of interest. With the exception of this last feature, there is no conflict between the Civil Code and the B.I.A., since the two provisions have the same effect.[54]

2. Protection of the debtor on the exercise of a clause of giving in payment or a hypothecary right (arts. 1040a C.C.L.C. and 2762 C.C.Q.)

Article 1040a C.C.L.C., enacted in 1964, is not a pre-Confederation provision. In any case, its constitutionality, like that of article 2762 C.C.Q., cannot be doubted.

Article 1040a C.C.L.C. concerned the clause of giving in payment, which gave a conditional right of ownership to the beneficiary creditor. To exercise his rights, the latter had to give the debtor 60 days' notice. Where there was a failure to pay a sum of money, or bankruptcy or insolvency, the debtor could then prevent the exercise of the clause of giving in payment by paying the arrears, interest and costs to the creditor. Article 1040a prevented the creditor from demanding other compensation.

The Civil Code of Québec prohibits a giving in payment clause (art. 1801 C.C.Q.). However, where there has been prior notice of the exercise of a hypothecary right, article 2762 C.C.Q. provides, as before, that the creditor is not entitled to demand any indemnity from the debtor except interest owing and costs.

This is a civil rule of public order in contracts. It is not a provision the purpose of which is to relieve the effects of insolvency, but simply a rule limiting the rights of the hypothecary creditor in specific circumstances. From this point of view, the provisions cannot be attacked on constitutional grounds.[55]

3. Privilege of the lessor (art. 2005 C.C.L.C.)

Under article 1994(8) C.C.L.C., a lessor had a privilege guaranteeing the payment of the rent. Article 2005 C.C.L.C. limited the extent of that privilege "in the case . . . of the liquidation of property of an insolvent person". This provision was repealed by the new Civil Code.

It is safe to assume that the provincial legislature may create legitimate grounds for preferences and limit their scope in specific circumstances, as in the case of bankruptcy, for example. The pursuit of greater equality among creditors justifies provincial intervention.[56]

It should be noted that article 2005 C.C.L.C. was inoperative in the event of bankruptcy under federal legislation. According to sections 73(4)(f) and 136(1) B.I.A., a creditor who seizes the property of a bankrupt for rent must deliver the property to the trustee; in addition, the lessor loses status as secured creditor and becomes a mere preferred creditor within the limits set out in paragraph 136(1)(f) B.I.A.[57]

4. Trustee as beneficiary of a contract of insurance (arts. 2578 C.C.L.C. and 2476 C.C.Q.)

Article 2578 C.C.L.C., adopted in 1974, provided that in the event of the bankruptcy[58] of an insured person, the insurance would continue to the benefit of the trustee in bankruptcy. Article 2476 C.C.Q. repeats this rule. This is obviously a provision that, under one aspect at least, has to do with a contract of insurance, and one that the provincial government may legitimately enact. It should be noted that subsection 24(2) B.I.A. is to the same effect: "All insurance covering property of the bankrupt . . . shall . . . notwith­standing any statute . . . to a contrary effect, become payable immediately to the trustee. . . ." The Civil Code article, undoubtedly valid in itself, therefore does not come into conflict with federal legislation.[59]

5. Specific rights of agents (art. 1754 C.C.L.C.)

This provision allowed the owner of goods entrusted to an agent to redeem the goods or to set off their value in the event of the agent's bankruptcy. This provision was repealed with the reform of the Civil Code.

Compensation is a civil law institution under provincial jurisdiction. Article 1754 C.C.L.C. established special rules on this subject because of the special relationship between the agent (art. 1736 C.C.L.C.) and the owner of the goods.

The bankruptcy laws of 1864,[60] 1869[61] and 1919[62] indirectly recognized a creditor's right, under the ius commune, of set-off or compensation against a trustee, provided it did not constitute a fraudulent preference. The Parliament of Canada thereby implicitly recognized the validity of the provin­cial laws relative to set-off or compensation.

6. Formalities relative to judgments ordering separation (art. 1313 C.C.L.C.)

This provision referred to the formalities provided for in the Insolvent Act of 1864. It was repealed in 1888 (see Table No. 2, reproduced in the Appendix).

F. Contracts (suretyship, partnership and sales)

In regulating certain types of contracts, the provincial legislature takes bankruptcy or insolvency into account in determining the rights of the parties. That kind of regulation is a fundamental part of civil law. When a debtor becomes insolvent, the civil law must concern itself with adequately protecting the rights of the creditors. Of course, the Parliament of Canada, in the exercise of its ancillary powers, could enact rules of a similar nature. This would once again be a matter of conflict of laws, but would not otherwise affect the validity of the provincial legislation.

As I have stated on an earlier occasion,

[Translation] Generally speaking, where the provincial legislature legislates on such matters, it does not enact compulsory rules, but rather, simple rules of interpretation from which the parties are free to derogate.[63]

These are the specific rules that affect contracts of suretyship, partnership and sale that will be the subject of discussion below. They are essentially matters of civil law and, from a constitutional point of view, present no difficulties of characterization. Even in exceptional cases where provincial legislation imposes mandatory rules, they, in pith and substance, are not aimed at relieving the effects of insolvency but at regulating the fate of contracts in effect.

1. Contract of suretyship (arts. 1940, 1944, 1946, 1947, 1953(2) C.C.L.C.; arts. 2337, 2348(2), 2350, 2351, 2359 and 2360 C.C.Q.)

Where a debtor offers or is required to provide his creditor with a surety, the latter must be solvent. If not, the surety must be replaced. Where the debtor invokes the benefit of discussion or a debt is guaranteed by several sureties, the Civil Code determines which of the creditor, the debtor or the sureties will bear the loss resulting from the inability of the debtor or a surety to pay, and how the loss will be distributed among the various sureties.

By its very nature, the regulation of a contract of suretyship must take into account the surety's ability to pay. The solvency of the surety is at the heart of this kind of contract. Apart from the fact that these provisions existed before 1867 and the new Code has only modified their form, it is clear that enactments relating to the solvency of the surety are an integral part of the civil law in pith and substance. Provincial authority over the matter is indisputable.

2. Law of partnership (arts. 1844, 1888a and 1892(4) and 1892(6a) C.C.L.C.; arts. 2207, 2226, 2248 and 2258 C.C.Q.)

A number of these rules, which were in force before 1867, were incorporated wholesale into the new Civil Code (1844 C.C.L.C. and 2207 C.C.Q.), while others were modified.

A contract of partnership is based on a relationship of trust among the partners. Reasons for the dissolution of this kind of contract necessarily come under legislative authority, which regulates their existence and operation. Provincial jurisdiction in this area has never been and could not reasonably be questioned. What is more, such regulation, far from hindering federal action, simplifies its operation. The dissolution of a partnership upon its bankruptcy or the bankruptcy of a partner makes administration by the trustee more efficient. In other words, not only is provincial action in this area entirely legitimate, it harmoniously contributes to the efficiency of federal legislation.[64]

Even if the partnership no longer has a legal personality (art. 2188 C.C.Q.), it can sue and be sued (art. 2225 C.C.Q.). Federal legislation provides in section 2 that "person" includes "partnership". Once again, such rules contribute to the harmony of the two systems.

Articles 1888a C.C.L.C. (enacted in 1878) and 2248 C.C.Q. impose restrictions on the rights of limited partners. In the event of insolvency or bankruptcy or insufficient partnership property, to repeat the formula used in the new Code, a special partner cannot claim as a creditor until the other creditors of the partnership have been satisfied. This restriction arises from the specific nature of the special partner's rights.

3. Rights of sellers (arts. 1497, 1543, 1998 and 1999 C.C.L.C. and arts. 1721, 1741 and 2651(2) C.C.Q.)

The Civil Code of Lower Canada contained specific rules for the rights of sellers. One such rule concerned the obligation to deliver the thing sold, while the others recognized specific rights for sellers of moveable things.

(a) Obligation to deliver (art. 1497 C.C.L.C. and 1721 C.C.Q.)

Article 1496 C.C.L.C. provided that the seller was not required to deliver the thing if the buyer did not pay the price. Article 1497 C.C.L.C. specified that the seller was not held to that obligation, even where a delay for payment had been granted to the buyer, where the buyer became insolvent. Article 1721 C.C.Q. stated the same rule. In the event of the buyer's insolvency, the seller finds himself in imminent danger of losing the price. It is therefore to be expected that he should then be dispensed from his obligation to deliver the thing.

(b) Specific rights of sellers of moveable things (arts. 1543, 1998 and 1999 C.C.L.C.; arts 1741 and 2651(2) C.C.Q.)

Article 1543 C.C.L.C. recognized a right of dissolution for sellers, while articles 1998 and 1999 gave them the right to revendicate[65] and a right of preference as to price.[66] However, the Civil Code of Lower Canada restricted the exercise of these rights in the case of bankruptcy. They then had to be exercised within 15 days after the delivery. The new Code (art. 1741 C.C.Q.) recognizes a similar right for unpaid sellers without particular restrictions in the case of bankruptcy. The seller's privilege has been replaced by a prior claim (art. 2651(2) C.C.Q.) which operates only if the goods have been sold to a person who does not operate an enterprise.

From the constitutional point of view, there are two issues: (1) Can a province recognize a privilege or a prior claim in favour of a creditor? (2) Can it enact restrictions on the exercise of this right and on the right of dissolution or revendication in the case of bankruptcy?

(1) Seller's privilege or prior claim

The right of the province to create preferences or prior claims for the benefit of certain types of creditors is clearly recognized. It may also be noted that the Bankruptcy and Insolvency Act gives to unpaid suppliers the right to repossess goods (s. 81.1 B.I.A.). It expressly provides, however, that "nothing in this section precludes a supplier from exercising any right that the supplier may have under the law of a province."

In Husky Oil Operations Ltd.,[67] Gonthier J. wrote about the "quartet" of leading Supreme Court decisions in this area:

In light of this distinction, it will be evident that none of the quartet cases was concerned with colourable provincial legislation. There was no question as to the validity of the impugned legislation in any of the quartet. Those cases are devoid of any suggestion that the impugned laws were anything other than provincial laws of general application, and thus validly enacted laws under the provinces' exclusive jurisdiction in relation to property and civil rights. Instead, those cases were only concerned with the applicability of provincial laws in bankruptcy, not their validity.[68]

A province, then, may validly create preferences, hypothecs or prior claims. The operative nature or applicability of such legislation in bankruptcy is an entirely different matter. If a province can create such preferences, it obviously can abolish them or modify them as it wishes. Accordingly, the repeal of articles 1998 and 1999 C.C.L.C., like the enactment of article 2651(2) C.C.Q., does not pose a problem from a constitutional point of view.

(2) Restrictions in the case of bankruptcy

As indicated above, an unpaid vendor had to exercise his rights in a bankruptcy situation within a certain time period. Originally, the time was 15 days but this was subsequently extended to 30 days.

It should be noted that article 12 of The Insolvent Act, 1864 established a similar rule. It provided that "[i]n all cases of sale of merchandise to a trader . . . subsequently becoming insolvent, the exercise of the rights . . . conferred upon the unpaid vendor . . .  is . . . restricted to a period of fifteen days . . ." Such restrictions in the bankruptcy legislation were subsequently repealed.

In light of this, there are two possible interpretations. It can be argued that articles 1543, 1998 and 1999 C.C.L.C. relate, in one aspect, to provincial jurisdiction and, in another aspect, to federal jurisdiction. In that line of thought, one would conclude that these pre-Confederation provisions, in their federal aspect, have survived despite the reform of the Civil Code.[69]

I am inclined to think that the federal aspect of these rules was expressed in bankruptcy legislation and their provincial aspect in the Civil Code. The federal aspect of the rule was repealed by the Parliament of Canada. The provincial legislature can do away with it for its own purposes.

G. Equality among creditors and prevention of fraud: nullity of certain acts and registrations (arts. 803, 1032 to 1040, 2023, 2085 and 2090 C.C.L.C.; arts. 1631 to 1636 C.C.Q.)

These articles have all been repealed, with the exception of those relating to the Paulian or revocatory action, which instead have been amended.

It is certain that, under one aspect at least, these rules come under provincial jurisdiction over property and civil rights.[70]

The difficulty is whether they are not also related, under another aspect, to federal jurisdiction.

Article 803 C.C.L.C. is undoubtedly the provision that poses the greatest difficulty. It provided for the revocation of gifts made by an insolvent person. The second paragraph of this article specified that "in the case of insolvent traders, gifts made by them within three months previous to the assignment, or the writ of attachment in compulsory liquidation,[71] are voidable, as presumed to be fraudulent." It is difficult to argue that that provision, referring directly to the procedure established by The Insolvent Act, 1864, does not include a federal jurisdictional component.

The same is true of the other provisions, but to a lesser degree. Articles 1032 to 1040 regulated the Paulian remedy. In their original formulation, they made explicit reference to bankruptcy legislation. Article 1037 C.C.L.C., for example, provided that:

Further provisions concerning the presumption of fraud and the nullity of acts done in contemplation of insolvency are contained in The Insolvent Act of 1864.

Similar references are to be found at the end of articles 1038 and 1039 C.C.L.C.[72]

The bankruptcy legislation was completely repealed in 1880 (43 Vict., c. 1). With the consolidation of 1886, there was no longer any legislation on bankruptcy. That is why, in Schedule A of the Revised Statutes of 1886, the provisions referred to above appear on the list of enactments repealed by the federal Parliament on the coming into force of the Revised Statutes of Canada.[73]

Article 2023 C.C.L.C. provided that hypothecs acquired upon the immovables of insolvent debtors within the 30 days previous to their becoming bankrupt were invalid. Article 2090 provided that registrations made within that time period were invalid. These provisions were similar to the Paulian action.[74] Article 2085 C.C.L.C., which was also repealed, provided that a purchaser could not claim priority of registration where he had acquired the immovable from an insolvent trader.

This last enactment, in my opinion, raises no difficulty. It clearly involves registration and not bankruptcy. A decision regarding the other provisions referred to above is less easy to reach. Do these rules fall entirely under provincial jurisdiction or do they relate, in one aspect, to federal jurisdiction and, in another aspect, to provincial jurisdiction? Both views can be defended. Despite all that, and somewhat hesitantly, I would be inclined to favour the first interpretation.

The bankruptcy legislation of 1864 (art. 8) and 1869 (arts. 86 et seq.) contained provisions on the revocation of gifts and the nullity of fraudulent contracts and payments. These statutes did not refer to civil law provisions. The two jurisdictions remained distinct. Remedies provided for under bankruptcy statutes became applicable where the debtor had been declared bankrupt, but remedies established by the Civil Code could be applied as soon as a debtor became insolvent or was in the condition of a trader who has discontinued his payments.[75]

It may be argued that the federal portion of this legislative area was completely contained in the bankruptcy acts while the provincial portion (subject to article 1037 and the references in articles 1038 and 1039 C.C.L.C.)[76] was expressed in the provisions of the Civil Code.

But the content and integrity of the Civil Code are indicative of the extent of provincial jurisdiction over property and civil rights . . . The fact that there existed a statutory scheme for bankruptcy and insolvency to which the Code explicitly referred as to a distinct and specific body of law, without curtailing for that reason its own normal ambit, illustrates how the respective domains of property and civil rights and of bankruptcy and insolvency were viewed during the very time when the federal union was being discussed; it reveals how it was intended that the distribution of powers should operate with respect to these domains.[77]

H. New provisions of the Civil Code of Québec

Although the new provisions are not part of the subject of this paper, it seemed useful to reproduce them in Table No. 3 of the Appendix. Some have been discussed above. As for the others, in particular, article 1392 on lapse of offer in the event of bankruptcy, article 2159 on the liability of the mandatary, article 2775 on the continuation of a hypothecary creditor's administration even in the case of the debtor's bankruptcy, and finally article 2990 on the trustee's certificate for publication purposes, they pose no problems of a constitutional nature in my view, except that they could, in certain cases, come into conflict with federal legislation.

CONCLUSION

The provisions of the Civil Code of Lower Canada that concern bankruptcy or insolvency have been analysed with a view to determining to what extent some may have survived, wholly or in part, despite the reform of the Civil Code. In some cases, repeal or amendment has not caused any problems from a constitutional point of view. In other cases, the answer is far from obvious, particularly with respect to article 803 C.C.L.C. Rightly or wrongly, in every case, I have preferred the interpretation favouring the greatest possible effectiveness in the reform of the Civil Code.

It must be recognized, however, that my opinion is, in some cases, based on rather frail underpinnings and is not universally shared. If one is seeking greater certainty and wishes to forestall possible legal conflict, legislative intervention by the federal Parliament in this area would be indicated. The economic interests at stake are often significant. It is easy to imagine that a trustee might be tempted to argue the survival of former articles 2023 and 2090 C.C.L.C. in attacking a hypothec acquired a few days before the application for bankruptcy was filed.[78] In the areas that concern bankruptcy and insolvency, a kind of "omnibus" intervention might be politically more appropriate. For example, the federal Parliament could provide that all pre-Confederation provisions concerning bankruptcy and insolvency contained in the Civil Code of Lower Canada, to the extent that they fall under its jurisdiction, cease to apply or are amended, pursuant to the provisions of the Civil Code of Québec . I proposed this in 1994.[79]

APPENDICES

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